Answer:
A. Determine how many miles Russell needs to drive to break even?
break even formula = total fixed costs / contribution margin
- total fixed costs = $1,220
- contribution margin = $1.30 - $0.29 = $1.01
break even formula = $1,220 / $1.01 = 1,207.9 ≈ 1,208 miles
B. Assume Russell drove 2,500 miles last month. Without making any additional calculations, determine whether he earned a profit or a loss last month.
if he drove 2,500 he made a profit because it is more than the break even point.
C. Determine how many miles Russell must drive to earn $2,135.00 in profit.
($1,220 + $2,135) / $1.01 = 3,321.7 ≈ 3,322 miles
D. Prepare a contribution margin income statement assuming Russell drove 2,500 miles last month.
total revenue $3,250
<u>- variable costs ($725)</u>
contribution margin $2,525
<u>- fixed costs ($1,220)</u>
net income $1,305
E. Use the above information to calculate Russell’s degree of operating leverage.
Degree of operating leverage = contribution margin / operating income = $2,525 / $3,250 = 0.7769 or 77.69%
